Wade pfau

In 2013, Investment News named Wade Pfau one of the “20 people expected to shape the financial advisory industry.” Since then, IN has named him to their lists of industry leaders every year, most recently on their list of “Icons & Innovators” of the financial industry in 2016. He has been recognized with numerous other honors, including sharing the [...]


Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
May 8, 2018
Dr. Wade Pfau: 3 Ways a Reverse Mortgage Can Supercharge Your RetirementDr. Wade Pfau: 3 Ways a Reverse Mortgage Can Supercharge Your Retirement

Dr. Wade Pfau of RetirementResearcher.com returns to Your Money, Your Wealth® to share some incredible reverse mortgage strategies that can supercharge your retirement when executed correctly. He also updates us on the new rules for reverse mortgages since the 2018 tax law has changed, explains why they have traditionally gotten such bad press, and how they’ve changed. A reverse mortgage just might be an option for your financial situation.

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Show Notes


Hey, how would you like a free book? Visit YourMoneyYourWealth.com, click “Special Offer” and we’ll send you a copy of the newly updated Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement. This book was written by today’s guest, one of the pre-eminent retirement experts in the country, Dr. Wade Pfau. It contains Dr. Pfau’s unbiased analysis of how reverse mortgages can help provide you, your parents or your grandparents with more income in retirement.  It’s yours absolutely free, just for listening to Your Money, Your Wealth – but it is first come, first served and supplies are limited (no, seriously, we only have like 40 of these books). Get yours by clicking “Special Offer” right now at YourMoneyYourWealth.com

Being able to just skip one distribution out of 30 years of distributions from your portfolio can literally make the difference between having nothing left at the end of 30 years, and still having a million dollars left at the end of 30 years. And that’s why something like a reverse mortgage, that provides  you the potential to just temporarily draw from that as a spending source, and to avoid a few portfolio distributions when markets really aren’t doing what they need to be doing for your portfolio, can help to sustain that retirement.” – Dr. Wade Pfau, RetirementResearcher.com

That is retirement researcher rockstar extraordinaire, Dr. Wade Pfau. He returns to Your Money, Your Wealth® today to give us the update on the new rules for reverse mortgages. He explains why they have traditionally gotten such bad press, how they’ve changed, and he shares some incredible reverse mortgage strategies that can supercharge your retirement when executed correctly. Now let’s get down to business – here are Joe Anderson, CFP® and Big Al Clopine, CPA.

01:37 – Nationwide/Harris: Over Half of Retirees Will Rely on Social Security

JA: We’ve got a great guest today, we have Dr. Wade Pfau. If you’ve never heard of Wade Pfau, he’s been on our show a few times, been on our TV show. Pretty smart guy.

AC: He is a smart guy, and there’s not too much that he doesn’t know about retirement planning, so it’ll be fun to interview him.

JA: Yeah. He’s a Professor at the American College, RetirementResearcher.com is his website. So if you ever want to know anything about retirement planning, that’s the website to go to – Retirement Researcher. He’s written a few books. There’s a lot of interesting studies and strategies that I think is a little bit outside of the box that he’s coming up with because he’s been studying this. He’s got a Ph.D.

AC: Right. And I think what he does Joe, is he runs all kinds of simulations on, “if you do this, if you do that, if you do this and that,” and he has found that, in some cases, not all cases, in some cases, it’s actually useful to have a reverse mortgage, which is a little bit contrary to what a lot of financial advisors say.

JA: Sure. And I think when you hear the term “reverse mortgage” it’s like, “oh man, that’s the last resort. I’m destitute. I don’t have any money, and I’m just going to now start tapping into my equity,” and everything else. If you live here in Southern California, you might have a lot of equity in your home, and we’ve done shows in the past of looking at how to tap into some of that home equity to provide yourself with maybe a higher standard of living in retirement. But Wade has several different interesting strategies of using the reverse mortgage, and not necessarily taking a lump sum onto your home and then investing that in such a way to create income. The reverse mortgage has changed quite a bit, and I think where he is going to talk to us about is what is called the HECM. It’s the line of credit within the reverse mortgage – the Home Equity Conversion Mortgage, it’s called. And it’s a very interesting tool that some of you might want to stick around and listen to, because what it could do: you could combine a couple of different strategies in regards to your overall financial plan, and there’s a lot of you that might have to do it as a last resort. But what he’s saying is that that’s the worst thing that you can potentially do. You want to look at this way before you’re down to your last couple of pennies. And this is, I think, a very useful tool for people that have multiple millions of dollars, versus people that might only have a few hundred thousand dollars. It doesn’t necessarily have anything to do with wealth, it’s just really a smart play to see if it fits into your overall situation. To see if you should utilize the strategies or not.

AC: Yeah I think that’s right, Joe. And I know we’ll get into this deeper, but, for one, if you are able to take some income from a reverse mortgage, you might be able to delay your Social Security benefits, or you might be able to do some Roth conversions, because you’re not you’re not tapping your IRA, you’re letting it grow till you hit 70 and a half. There are other things too, but you’re right. There are strategies where, even if you’ve got plenty of assets, that might make sense for your overall wealth of the family.

JA: Yeah because we see these studies – what is this thing that you gave me just this morning? “Over half of future retirees will rely on Social Security as their main source of retirement income.” Half. But then you dive in, and this is – I don’t even know who wrote this. Who wrote this. Nationwide? This is the Harris poll that did this study, and they’re looking at nine in ten – 88% of older adults don’t know what factors determine their Social Security benefits that they will receive. Nine in 10! So I don’t know how many people they surveyed…

AC: Yeah I think it was a thousand, but yeah that’s a lot. And I guess it doesn’t surprise me in a way, Joe, because you and I interview advisors to join Pure Financial, we have a very strict thing that we go through, we want to make sure people are very competent. And it’s surprising, even advisors that look good on paper, they don’t understand Social Security.

JA: It’s so complex. There are so many different combinations when you look at a survivor benefit to a spousal benefit. And if you claim early versus if you claim later, restricted applications and file and suspend. I mean, there are so many different rules, and a lot of them went away in 2015, but some of them still apply to certain individuals depending on their age. And then you go to the Social Security Administration and you try to claim for certain strategy, and then they’re now tied on the new rules versus the old, even though you could claim on the old rules, and then you’re getting denied on some benefits that should…. you know, this just happened to my mother. My father died eight years ago. And so she was claiming a survivor benefit. She started that at age 60, and she was letting her own benefit grow. And something happened, and we were taking a look at it, and I was like, “this doesn’t look right.” And so she put an inquiry into the Social Security Administration, and lo and behold, they made a mistake, and then they cut her a check for like $50,000 because they screwed up for the last so many years! So you want to make sure that you understand Social Security, and understand what benefits that you should receive, or looking at your record of history into the system, how many years have you put in, look at your earnings records, and making sure that the entitlement that you deserve is accurate.

AC: Joe, I can recall a few years ago, a client of ours went to the Social Security office and this is when you could do the file and suspend and restricted application. And in this case, they went in to do this, the spouse with the higher income was going to file and suspend, and the other restricted application to claim the spousal. And they went to the Social Security office – this is before the rule change – and the Social Security people said, “you can’t do that.” And so he called me up and said, “well they said we can’t do it.  I said, “Well, I’ll tell you what: you can do it, and I’m going to download their website page, so you can take it to them.” So they went back again, and they didn’t even need to use it because they got a different person that actually understood it. So don’t necessarily assume that the information you get from the Social Security agent is correct. I’m sure most of them are great.

JA: Of course. But they’re overworked, underpaid, probably.

AC: That’s right. Same as the IRS. Just be careful.

JA: Right. Just get educated. Take a look at, “what is the appropriate claiming strategy for me?” Because if this data is true, there’s a lot of you that are looking to maximize the amount of benefit that you can receive. And I think, if you’re listening to this show, you probably have some inkling of what the rules are. If you claim at 62, that’s the earliest that you can claim as long as you qualify for Social Security benefits. But if you do claim early, you’re going to receive a reduced benefit. If you claim at full retirement age, then you’re entitled to your full retirement age benefit. But if you wait until age 70, that’s the latest that you would want to wait. Then you get an 8% delayed retirement credit, it’s called. So you can increase your benefit if you wait. And so then it’s looking at what do you do? Do you take it at 62 or 70 or any month in between? And then if you’re married, which spouse takes it at what age, and how does the combination of the two benefits work out? Because then you have to look at the spousal benefit versus the survivor benefit if someone has maybe a shorter life expectancy than the other. So then you have to put all of that into your retirement accounts. So how are you going to take your Social Security benefits in conjunction with your 401(k), versus your Roth IRA, or if you have other savings. And then putting that all together. And then what we’ll get into a little bit later on in the show is now there’s another tool that potentially people are using in regards to this home equity conversion mortgage which can provide you some tax-free income on top of it. So maybe it might make sense to delay, but even though you need cash flow, well there’s another tool that you can use to create some additional cash flow a tax-free, where then you can maneuver your assets in such a way to make them last even longer as you age.

All right, word of warning, we’re about to get into reverse mortgages with Dr. Wade Pfau, who is a serious brainiac, so this part could get thick. If you’d like to read a transcript of this podcast, catch up on our previous podcasts, or subscribe so you don’t miss any future podcasts, just go to YourMoneyYourWealth.com. While you’re there, watch clips and full episodes of the Your Money, Your Wealth TV show – learn more on just about every personal finance topic that affects you, and satisfy your curiosity about what Joe and Big Al look like. Check it all out at YourMoneyYourWealth.com

Dr. Wade Pfau10:22 – Wade Pfau on Reverse Mortgages: Create Liquidity From Your Housing Wealth

JA: Welcome back to the show folks, the show is called Your Money, Your Wealth®. Joe Anderson here, Big Al Clopine hanging out here. Thanks for tuning in. We’ve got a special guest, Dr. Wade Pfau. He’s a professor of retirement income in a Ph.D. program for financial and retirement planning at the American College. He also serves as principal and director at McLean Asset Management and he holds a doctorate in economics from Princeton University and publishes frequently in a wide variety of academic and practitioner research journals on topics related to retirement income. Wow! With that introduction, DR. WADE PFAU!!

WP: Hi! (laughs) It’s great to be here.

JA: Dr. Pfau has been on our show multiple times.

AC: Many times, he’s been on radio and TV, and we’re very, very fortunate to have Dr. Wade Pfau, how are you doing, Wade?

WP: I’m doing great, yeah, thanks for having me on again.

JA: The last time I think you were on, Wade, was last year. We talked about reverse mortgages. Let’s talk high level because I think there’s a lot of misinformation when it comes to reverse mortgages. You wrote a fantastic book on how to potentially utilize home equity within your overall retirement income strategy. So let’s start there. And then there are some nuances in the law that changed a little bit. So you have the second edition of the book out, and so let’s talk high level, then we can get into the weeds a little bit as we go.

WP: Sure. Right. So last August, I was on a family vacation when the news came out that the government was changing some of the parameters in the reverse mortgage rules, and that gave me the joy of basically rewriting the whole book for the second edition that came out earlier this year. And it did change some of the parameters around the reverse mortgage program. The aspect of it that was incredibly exciting for financial planners, and that’s why it is getting more and more of interest and discussion, was this growing line of credit aspect of the reverse mortgage – and that still exists, it’s just slowed down.

AC: Dr. Pfau, why don’t we start with the basics. Like, for example, you need to be at least 62 years of age. For our listeners, why don’t we go over some of the basics of reverse mortgages?

WP: So a reverse mortgage is, fundamentally, a way to create liquidity from your housing wealth, so that you’re able to integrate that into your retirement strategy and spend from housing wealth throughout retirement. You do have to be 62 or older to be a borrower, if you have a traditional mortgage on your home, you can refinance the mortgage into the reverse mortgage, but you cannot have a reverse mortgage open while also having other debt on the home. You have to meet homeowner obligations, in terms of paying your property taxes, keeping up the home, paying for homeowner’s insurance. You have to go through a counseling session. It does have to be for a primary residence, not for a vacation or a second home. And I think that’s most of the basics on eligibility.

JA: When you look at it, I think for a lot of individuals, when they hear the word or term “reverse mortgage,” I think it’s like, “oh, that’s the last resort.” And I think with some of your findings, that’s not necessarily the case anymore.

WP: Right. That sort of last resort has been the conventional wisdom around the reverse mortgage – that it’s something you might only consider if everything else has failed. If you’ve fully depleted all your assets, you have to meet some major spending obligations, and you have no other choice but to use the reverse mortgage. And going back to research that’s been published repeatedly, making the same points since 2012 in the Journal of Financial Planning, it’s been shown time and again that that sort of last resort conventional wisdom around a reverse mortgage is really the worst possible way to handle using a reverse mortgage. That if you’re going to use a reverse mortgage, you’re generally going to be better off by opening it up sooner, before it’s needed, and giving that line of credit that I mentioned an opportunity to grow bigger, so that you’ll have more access to funds by the time you need them, than just simply waiting until everything else has failed and then trying to open the reverse mortgage.

JA: Right. So let’s dive into that. So what you’re referring to is the HECM – the Home Equity Conversion Mortgage. It’s basically a line of credit that you can open up, but it’s not necessarily your typical line of credit that someone is familiar with. So I have a first mortgage on my house, and then I also have a home equity line of another $100,000 that I’ve used for multiple purposes. And I have to pay that home equity line back in the form of cash flow, to pay off that note. But in a home equity conversion mortgage, or a reverse mortgage, when it comes to that line of credit, it’s a completely different animal. Can you explain a little bit more to our listeners on how it actually works and what the benefit is of it?

WP: Yes. You mentioned one important difference and benefit is that with the traditional home equity line, you have to make those repayments on an ongoing basis. With the reverse mortgage, you can wait until the hold on balance becomes due, and that can be just until you have left the home or haven’t paid your property taxes or something along those lines. Otherwise, you don’t have to make those ongoing payments. The line of credit also cannot be frozen or canceled, which, after the financial crisis in 2008, when a lot of people were looking to use their home equity lines of credit, they were getting frozen and canceled. And so, the reverse mortgage is guaranteed not to have that happen. And then the interesting planning aspect is that this line of credit can also grow once you’ve opened it. And that basic intuition there is when policymakers designed the HECM, the Home Equity Conversion Mortgage Program, they assumed people would generally use these to borrow. To use the reverse mortgage to take out proceeds, and then it would be stored as a loan balance, and probably everyone can understand why the loan balance grows. It’s growing with interest over time. So the planning technique with the reverse mortgage is, you can open one up, but you don’t have to borrow heavily from it. You do have to keep a very minimal loan balance to keep it open. But for the most part, almost all of the reverse mortgage can be kept in the form of a line of credit, rather than as a loan. And the interesting thing is, the line of credit grows at the same rate that the loan would have been growing. And that’s how you get this aspect of the growing line of credit with a reverse mortgage.

JA: So if I understand correctly – how much line of credit can I take out?

WP: It depends on your age and interest rates. If you’re 62, the earliest age you can start to use a reverse mortgage under the new rules since last October, and with where interest rates are today, it would be about 40% of the home value, up to a maximum home value that can be considered of around $679,000. So 40%.

JA: So let’s just call it a few hundred thousand dollars, I’m 62, so let’s just say I take a few thousand dollars of the $200,000, as a minimal balance that I’m going to take out as a loan, but I still have $198,000 as a line of credit. And I’m just making up numbers here, Wade, so if I’m way off base just stop and interject. But the point of this is that, if I open this thing up at 62, I’m not planning on using this line of credit for some time. And let’s just assume that interest rates were at 4%. So that open line of credit, in my example of $198,000, is going to continue to grow by that 4% compounded per year. So maybe over the next 10 years, that $200,000 balance line of credit that’s available could double or even more when I’m 72, let’s say. Is that a fair, accurate assumption?

WP: Right. It’s a variable interest rate, and it’s linked to current interest rates. But yes, over time that line of credit is growing at an interest rate somewhere in the neighborhood of 4 to 5 and then potentially even 6% if interest rates go up to some extent in the future.

AC: So if I’m 62, should I go ahead and get a reverse mortgage, if I think I’m going to need one? Or should I wait until 70 because maybe it will be better?

WP: Well yeah. So that’s the idea, that if you’re in a home that you’re anticipating you’ll stay in. And of course, you might ultimately decide to move at some point, but if you really think you’re in the home you want to be in throughout retirement, it’s worth seriously considering opening that line of credit as soon as possible. For a couple of reasons. If you wait, and if your home value grows, then if you open the reverse mortgage later, you’re getting a higher percentage due to your higher age of a larger home value. So you will get more funds at that time than you would today. But it’s really hard to beat the idea that if you open it today and let that line of credit start growing over the years, then that growing line of credit is almost surely going to be worth more than you would get if you had waited to open the line of credit at that time. The line of credit is going to grow faster than what you’d be able to get by waiting.

AC: And just for clarity, so when you say the line of credit is growing,  it’s not that your balance is growing. You haven’t borrowed yet. It’s just that your ability to borrow, it keeps increasing.

WP: Right. If you haven’t borrowed, it’s line of credit. Whatever you’ve borrowed from it is growing at that same interest rate. And then whatever you haven’t borrowed from that initial capacity that you had, is growing at that same interest rate.

Dr. Wade Pfau dives deeper on reverse mortgages in just a minute, but in the meantime, we’ve still got a few copies of his reverse mortgages book to give away. Visit YourMoneyYourWealth.com, click “Special Offer” and we’ll send you a copy of the newly updated book, Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement, absolutely free. Learn how reverse mortgages work, and how they can help you hold onto more of your money in retirement. For more on this great retirement income strategy that gets such a bad rap, just click “Special Offer” at YourMoneyYourWealth.com and we’ll send you Dr. Wade Pfau’s book as a thanks for listening to Your Money, Your Wealth®.

20:25 – Wade Pfau: How Reverse Mortgages Have Changed and Strategies for Stretching Your Retirement Dollars with a Reverse Mortgage

JA: The show is called Your Money, Your Wealth®. Joe Anderson, Big Al hanging out. Thanks a lot for tuning in. Talking to Dr. Wade Pfau. Check him out online at RetirementResearcher.com.

AC: If you look back to the Great Recession, a lot of people had overused their home equity with home equity loans, and so obviously with reverse mortgages, you’ve got to have a certain amount of discipline for this to make sense.

JA: Not necessarily. Because if I have a line of credit, I’m not using the line of credit. And that line of credit could actually be more than the home value at some point, isn’t that correct, Wade?

WP: Right. But you do need that discipline. I always emphasize this is being used as part of a responsible retirement income plan. If you’re tempted to just spend the money because it’s now liquid and available, that would not necessarily be a good outcome.

AC: And I think that’s what we saw 10 years ago – people were using their home as a piggy bank. And you don’t want to do the same thing with a reverse mortgage.

WP: Right. You’ve got to treat it as not being tempted to use it just because it’s there.

JA: But even if I did, I don’t have to pay anything back!

AC: True but you might need it later.

JA: Yeah but let’s say if I did a forward mortgage, that’s what blew people up, because we couldn’t afford the payments. If I did a reverse mortgage – and I’m very irresponsible, Wade. So I’m just going to buy boats and new cars with this stuff. (laughs) But at the end of the day, if I stay in my home and die, I’m good. I enjoyed my life.

WP: Mm-hmm.

JA: See, Wade’s with me!

WP: (laughs) Yeah, you’re touching on the aspect of, it’s a non-recourse loan. So that if the loan balance grows to be higher than the value of the home, then the home can be used as the collateral to it. You don’t have to pay back more than 95% of the appraised value of the home when the loan balance becomes due. So you can get a windfall from that, although that will become rarer under the new rules post-October. It was a lot more likely and still exists for anyone who opened their reverse mortgage before October of last year. But under the new rules for new loans, it’s less likely at this stage that the loan balance or the line of credit would grow to be worth more than the value of the home. And that’s to protect the mortgage insurance fund. It was a kind of unintended consequence of people figuring out ways to (laughs) take advantage of this government-created program.

JA: Why do you think they came up with this? Did the government realize, “people have some equity in their homes but they don’t have any dollars to help create income, and so we need to come up with a better program to help retirees have a more fulfilling retirement by utilizing some of these tools”? What’s your take on that?

WP: I think that’s a main purpose, and as you look at kind of across the income and wealth distribution, kind of the lower middle class or middle-class type retirees will have a much higher percentage of their household wealth stored in their home equity, compared to any sort of investment assets that they have on the side. And you can’t easily spend your home equity. It’s this huge asset this just sitting there. And if there was a way that you could also take advantage of being able to spend from that during your retirement, while also living in the home, that could really help improve your retirement outcomes. So I think the public policy idea here was help provide – and this is a tool that helps middle-class type Americans more than it helps high net worth or extreme high net worth Americans, although it can be helpful for them as well. Just, relatively speaking, not as helpful. But to help those middle-class Americans have a more fulfilling retirement by having this way to create liquidity and spending power from their home equity while still being alive and still being able to live in their home.

AC: It seems like ten years ago let’s just say, reverse mortgages didn’t really have a very good reputation. What has changed since then that they’re worth another look for people?

WP: You’re right that they’ve not had a good reputation, and there are still the late night commercials where celebrity endorsers are hawking them along with other kinds of things that you generally don’t have really positive views about. (laughs) But in terms of what’s changed, it’s been a few different things. Some of the issues within the reverse mortgage program that created problems in the past that led to negative media coverage have been corrected. So there are now protections in place to protect spouses if they’re younger than the age of 62 when the loan was taken out so that they’re not borrowers, but they can still stay in the home until they naturally wish to leave the home as well, without the loan balance coming due. There are now financial assessments to really discourage using them as a last resort because they want to make sure people will still have the resources to meet their homeowner obligations. And that’s going to help reduce the need to have any sort of foreclosures on people because they’re not maintaining the home in the way that they’re supposed to, to have the reverse mortgage in place. And then it’s just been all the research, as there’s been a greater appreciation of retirement income as a distinct area of financial planning, and how the nature of risk changes in retirement with longevity risk, not knowing how long you’re going to live, and the whole issue of sequence of returns risk, and how it’s not just how markets do during your retirement on average, but the specific order of the returns. And if you get poor returns early on, that can really disrupt an individual’s portfolio, even if the overall market recovers later. And these risks are hard to manage, and it’s hard to manage them with just an investment portfolio. And so there’s an appreciation for tools like a reverse mortgage to help in a number of different ways to help sustain a retirement plan.

JA: Let’s talk about that a little bit more in detail. I think you point out in your book some phenomenal strategies that people should actually really take a deep consideration for. And one was the sequence of return risk that you were just alluding to. So let’s say that I have a portfolio, I might be heavily weighted in equities, taking dollars from the overall portfolio, then we have another market crash. And now I’m pulling dollars from a portfolio that could be down 20, 30, 40%. And we all know with that is, if I lose 50%, I need a 100% rate of return to get my money back, and if I’m taking dollars from the portfolio, it’s going to be a very long road for me to get caught back up. And some of the strategies that you talked about in your book is to say, hey, when that market goes down, when you have down markets in retirement, and if you have this home equity conversion mortgage that you can tap into tax free, instead of selling your stocks down, you have a reserve that you can live off of and wait for that market to recover. And then once that market recovers, then you could do one of multiple things – you could either pay off the home equity conversion mortgage, and you’re not selling stocks when they’re down, or just giving you that safety cushion to make sure that your portfolio is going to last you the 20-30 years that people have to plan for in retirement today.

WP: Yeah, you explained it perfectly. That’s the buffer asset approach that the research has been most focused on. That when your portfolio is down in value, rather than having to sell off assets at a loss to sustain your retirement spending, you temporarily draw from the reverse mortgage line of credit and give your portfolio the opportunity to recover until then resuming spending from it. And as you said, potentially even voluntarily paying down the loan balance if the markets are doing better, so that you have more line of credit for the future after that. And that’s a huge factor in helping to manage that sequence of returns risk, being able to just skip one distribution out of 30 years of distributions from your portfolio can literally make the difference between having nothing left at the end of 30 years, and still having a million dollars left at the end of 30 years. And that’s why something like a reverse mortgage, that provides the potential to just temporarily draw from that as a spending source and to avoid a few portfolio distributions when markets really aren’t doing what they need to be doing for your portfolio, can help to sustain that retirement.

JA: Another strategy I really enjoy too is, Al and I are big fans of tax diversification, looking at Roth conversions, making sure that you have money in all different areas so when you’re taking distributions from your portfolio that you can control your taxes. And we love to maximize Social Security as well, but sometimes when people retire, they feel a sense of security that they need some form of income flow to come in – versus maybe tapping into the overall portfolio. So this is another tool that could be used for individuals to bridge the gap, to let’s say pushing out Social Security till age 70, versus taking in a full retirement age. The reverse mortgage is giving them some form of income, and that income is coming to them tax-free. And that is not going to show up on their tax return, that’s going to keep their taxes low, so they can potentially then – in conjunction with that – do some Roth IRA conversions, by getting some of their retirement accounts into a tax-free environment. And then once they turn age 70, they can turn their Social Security on, and then they have a lot more money and Roths, and so on and so forth. And so, it’s a very tax efficient play that people can utilize. And this is not a last resort type of thing. This is for all individuals that are just looking to have a better, more efficient retirement income strategy, in my opinion.

WP: Yeah, absolutely. And it’s tax-free income because it’s the proceeds from a loan, and as proceeds from the loan, it doesn’t go into your adjusted gross income – it’s not taxable income. But that’s right, if you retired at 62, so you have no work income at that point, and you’re persuaded by the idea you should wait until age 70 to start your Social Security benefits, and suddenly you have this eight-year window where you don’t have taxable income, it’s a great opportunity to do Roth conversions, with all the money in your IRA, to pay taxes on it when your tax rates are lower. And then to help avoid, after age 70 and a half, having to pay taxes at a higher tax bracket because you have now Social Security income and you have these required minimum distributions from your IRA accounts. Those required minimum distributions will be a lot less if you move a lot of that money over into a Roth IRA before getting to that age 70 and a half. And in terms of delaying Social Security, that can cause the stress of for these eight years you have to take a higher distribution from your investments, because you have to account for the missing Social Security benefits, if you didn’t claim at age 62 instead, well you could use a reverse mortgage to replace that missing Social Security benefit for those eight years, to build a bridge to get you to age 70, and then to have a permanently 76% higher – in inflation adjusted terms – Social Security benefit for the rest of your life.

JA: We’re talking with Dr. Wade Pfau. He’s a Ph.D. CFA. He’s a Professor of Retirement Income at the American College, and he’s got a great book. I have it in my hand. It says The Retirement Researcher’s Guide Series. So you have the full series? You’ve got several books coming out here, Wade?

WP:  I’m going to have two more. There’s two out now and two more on the way. (laughs)

JA: We’re talking about reverse mortgages, and Wade is at the forefront of some of this research. Thank you so much, Wade. It’s always a pleasure talking to you. And again, you can find Dr. Wade Pfau’s work at RetirementResearcher.com.

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32:20 – The Myth of Outliving Your Retirement Savings

I want to actually talk about an article I just saw a couple of days ago in Reuters. “The Myth of Outliving Your Retirement Savings.” Because it seems everywhere you look when people talk about retirement savings, and the status of the baby boomers, and how they don’t have near enough money, and most research even points to an impending retirement crisis for like at least half of Americans out there. Which is kind of consistent with what we talked about. Half of Americans are relying on Social Security as their main form of income. This article takes a little bit different approach. A this was a study done by Employee Benefit Research Institute. And here’s what they found. They found that people tend to adjust their spending to what they have saved, or what the income is. For example: first of all, they started with people with less than $500,000 savings. That’s a big range. And they broke down a little bit further.

JA: Let’s start with people with five million bucks. Guess what? They can do it! Weird!

AC: And they’re OK. They don’t seem to run out of money! It is weird! (laughs) So they started with $500,000 in savings, and here’s what they found out: that on average, the person or couple spends only about a quarter of that during the first 20 years of retirement. A quarter would be $125,000. So in other words, what they’re saying is, on average, someone that had $500,000 savings would still have $375,000 in 20 years. Now that’s with $500,000 or less.

JA: Because they have giant pensions so they don’t need to spend it. (laughs)

AC: In some cases, yeah. One-third of the people actually end up with a nest egg larger than when they had left their jobs. So I guess when they say “and up” – does that mean they die? I think that’s what they’re implying. (laughs) They end up with more than when they started. And let’s see, how about this. Even people that had $32,000, I don’t know how they get that figure, but you have $32,000 dollars when you leave the workforce. Those people had about $24,000 left some two decades later. In other words, they adjusted spending. And part of this is, when you look at the sort of rational behavior on spending, think about when you have a job, and it’s easy to spend your net pay. But if you have money going into a 401(k) or 403(b), you don’t really even think about it. You just somehow tend to spend what you have. And in the same way with retirees, they have pensions or they don’t have pensions, they got Social Security. They spend what they have, and they try not to go through their principal. So in other words, what they’re finding from this study is, a lot of people are adjusting their lifestyle. They found that people that had plenty of money still were living a very modest lifestyle because they were so afraid about the future. And in some cases, financial planners need to get in and say, “it’s OK. It’s OK to spend a little bit more because you got plenty.”

JA: Sure. Yeah, we see that often. Really good savers are awful spenders. Spenders will spend whatever they can get their hands on.  And so if they can only get their hands on a little bit, well they’re going to spend it. But there’s nothing left. And I think for the most part people are rational. And so if they could go back in time and save a little bit more money so they could spend a little bit more, I’m sure they did. I’m sure all of us want to do that. But at the end of the day, if you only have X amount of dollars, then you’ve got to reduce your lifestyle, bear down. I would like to know how happy they are.

AC: Well, that’s a good point. And maybe they’re not living the retirement of their dreams. But they’re getting by. They’re not necessarily on the streets. And of course, that’s part of why there is Social Security. Social Security is designed to cover maybe 25%, 30-33% of your income, depending upon your income level. That’s what it’s designed to do. And does that mean you can live the same lifestyle? Absolutely not. You need you need pensions or you need other assets to create some kind of additional income. But at least it’s there so that you’re not on the streets, you’re not homeless, you got some food, whatever.

JA That’s pretty uplifting. (laughs)

AC: Yeah. I was going down a path, I was trying to change that, but there was no way to get the words come out different. (laughs) So you’re not on the streets and hungry.

JA: So if you want the ramen noodle retirement, just talk to Big Al. We got it. We got it covered. (laughs)

AC: It’s easy, you just fall into this study. You spend less than what you have, and there you go. But anyway, I thought it was interesting because of the simple fact that so many articles talk about the impending retirement crisis. And I think we got to give people a little bit more credit than that. I think even spenders, if they’ve got $50,000 dollars when they retire, and in two months it’s $40,000, I think something triggers them to realize, “whoops, this isn’t sustainable. So we got to make some big changes.”

JA: Yeah, but you know these surveys are so ridiculous too. The only surveys that I really like are the ones that are looking at the data with tens of thousands of people. Like Fidelity will do a survey, but they’re not asking people’s opinions. They’re taking a look at retirement balances, and they’re saying, “because we have billions and billions of dollars of retirement assets on our platform, and we know their ages, and we know their balances, so we can do a study looking at ‘here’s what we’re seeing and here’s what we’re finding within the data that we’re looking at,'” versus, “let’s survey a thousand people and what their overall opinion is on overall retirement.” You know what I mean? Because people will lie. Like the Employee Benefit Research Institute. So they’ll say, “how many of you have run the numbers to figure out how much you need in retirement?” 50% said, “Yeah!” There’s no way that people have actually done the math to truly figure out exactly what that nest egg should be to provide the lifestyle that they are living right now.

AC: Yeah, we see hundreds of people, thousands even, each year. And I would say is that it’s probably one out of 50 maybe, something like that.

JA: Yes. And I’m out teaching retirement classes and I asked that question. “How many of you really know your number?” And then you’ll get maybe one or two, but then I’ll show them the exercise of what they need to do. And then all of a sudden it’s just like, “is that the number you came up with?” And they’ll be like, “uhhh, no, not really.”

AC: Yeah. So I agree with you, Joe. To me, the surveys that ask, “Are you concerned about retirement?” “No! Not at all!”

JA: Yeah, “I feel pretty confident.”

AC: They have no idea.

JA: Yes, this “confidence survey.” “Yeah, I’m really confident we’re going to live my dream!”

AC: But where I agree with you that the surveys that make more sense are data-driven, or they’re talking to the people that are already retired, instead of thinking about retiring, because so many people are overconfident when it comes to retiring.

JA: Totally. And it’s like, you get a telephone call, “have you got a couple of minutes to talk about your retirement?” “Sure, I got nothing else to do.” (laughs) “So are you happy?” “Love it! This is great! Thank you so much for calling because I’m bored out of my mind!”

AC: They don’t want to say, “oh, If I would have known it was this bad…”

JA: “This is awful!”

AC: “…I would have never quit the workforce at 74.”

JA: Yes, because no one wants to admit that. “Yeah, I made some awful mistakes, I didn’t save nearly enough.”

AC: Yeah. But going back to this survey that I just quoted, this was somewhat data-driven, because they looked at, actually, balances the people had before and 20 years later.

JA: How did they get the balances? It’s Reuters. They asked them, “What was your balance five years ago?” “About 100 grand.” “What is it today?” “About 105! I’m not spending any of it! I’m very prudent with my money!”

AC: “I got more than when I started!”

JA: “And it’s none of your business, but if you want to talk about the weather, I’d love to do that just to keep you on the line!” (laughs)

AC: (laughs) So I guess the moral of that is, take these surveys with a grain of salt.

JA: (laughs) Yeah, don’t even listen to the show anymore, it’s just a bunch of BS. All right, that’s it for us. We had fun today, hopefully, you enjoyed the show. For Big Al Clopine, I’m Joe Anderson. We’ll see you next week.


So, to recap today’s show: Between the line of credit, the ability to buffer your assets, and the possibility of building a Social Security delay bridge, the reverse mortgage may be a great strategy for you. Or your parents – or grandparents. Special thanks to our guest, Dr. Wade Pfau, for telling us all about ‘em. Read more at RetirementResearcher.com.

And hey, thanks to Dr. Jim Dahle of the White Coat Investor podcast for helping us name this episode! Made ya click!

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.